No state is a winner when it comes to running India’s PSUs.

Most attention on India’s public sector undertakings focuses on those whose majority owner is the central government. That is to be expected. As my last column noted, central public sector enterprises (CPSE) continue to have a considerable presence in the Indian economy, epitomised by their dominance in the banking and energy sectors. Less is known about the state of play of state public sector undertakings, which comprise state government companies as well as statutory corporations. The former includes state road transport corporations, state financial corporations, state electricity generation and distribution companies and numerous others in sectors from water to warehousing. The latter, i.e. statutory corporations, usually comprise Electricity Regulatory Commissions.

The state public sector undertakings’ (SPSUs) activities are commercial in nature, with the ostensible goal of public welfare.

The reports on state public sector undertakings from the Comptroller and Auditor General (CAG) provide some data as well as ample grounds for much gloom.

How important are SPSUs for the state economies?

Number

Left-leaning states like Kerala and West Bengal seem to live up to their reputations when it comes to the number of SPSUs. Kerala has the largest number of working SPSUs (113) while West Bengal has the fourth largest number (after Karnataka and Gujarat). About a quarter of the 1,173 SPSUs across the 16 largest states are “non-working”. Nearly two-thirds of SPSUs in Telangana and more than half in Bihar are “non-working”, with wind-up processes taking eons.

Investment

Total investment (capital and long-term loans) in SPSUs in the 16largest states at the end of FY 2015-16 was Rs 1,168,000 crore, with a wide variance across states. Interesting, in contrast to the number of SPSUs, Left-leaning states like Kerala and West Bengal invest much less in SPSUs compared to so-called business-friendly states like Gujarat, Tamil Nadu and Maharashtra.

Turnover

However, when it comes to the overall economic importance of SPSUs within each state’s economy – as measured by turnover as a ratio of state GDP – then Madhya Pradesh emerges as the surprising winner. The relative importance of SPSUs is much less in the case of West Bengal and Kerala than it is for Tamil Nadu and Gujarat. One reason for this is the increasing role of state PSUs for food grain procurement in some states. For example, the Madhya Pradesh State Civil Supplies Corporation Limited acts as the nodal agency of the state government for procurement and distribution of food grains. Between 2011-12 and 2015-16, the turnover of this firm more than doubled, from Rs 8,439 crore to Rs 17,302 crore.

Employment

As with investment, employment in SPSUs varies widely with Tamil Nadu as the largest employer by far. Almost half of state PSU employees in Tamil Nadu are employed by different state transport corporations, while another 30 per cent are employed by the Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO). About 10per cent are employed by the Tamil Nadu State Marketing Corporation Limited (TASMAC), which has the monopoly of liquor wholesaling and retailing in the state. Unsurprisingly, its monopoly gives it a high turnover (Rs 30,542 crores in 2015-16). But surprisingly, it still makes a loss (Rs 125 crores in 2015-16). It takes considerable skill to make a loss on a liquor monopoly.

So-called ‘statist’ West Bengal has less than half as many employees in SPSUs as ‘business-friendly’ Gujarat. The richer states have more SPSU employees, possibly because they can ‘afford’ them. Total employment in all SPSUs combined is less than 1.5 million or just above 0.1 per cent of India’s population.

State PSUs are neither major public instruments of employment nor bloated with runaway patronage.

Note: Data for Maharashtra is from 2014-15; manpower numbers for Rajasthan were not available.

Earnings

Unsurprisingly, in aggregate, state PSUs suffer large losses with the electricity sector being the principal culprit. In 2015-16, the total losses of PSUs in the 16 largest states amounted to Rs 62,931.21 crore with losses in state PSUs in UP alone accounting for Rs 17,790 crore. Power sector PSUs in UP alone accounted for Rs 18,178 crore of losses that year and Rs 95,575 crore in accumulated losses. From 2011-12 to 2015-16, state PSUs in UP accumulated losses of Rs 65,383 crores, demonstrating the exemplary stewardship of public funds in one of India’s poorest states.

Return on capital

So, what does the public get for all this investment? Unsurprisingly, that is a dismal story. More than half the states had a negative return on capital invested in SPSUs, three had less than 5 per cent and only two above 10 per cent, with Odisha having the highest return that year because of high profits from a mining SPSU. With costs of borrowing (as proxied by yields on state government bonds) in the range of 8.5 per cent, SPSUs have self-evidently high opportunity costs.

Clearly, there are some sectors that are the worst performing with electricity generation and distribution companies and road transport corporations heading the pack. One of India’s better-performing states exemplifies this. In 2015-2016, of 68 working Tamil Nadu government PSUs, 39 PSUs earned profit of Rs 931 crore while 25 PSUs incurred loss of Rs 9,366 crore. The bulk of the losses were incurred by the Tamil Nadu Generation and Distribution Corporation Limited (Rs 5,787 crore) and the eight State Transport Corporations (Rs 3,049 crore).

The sorry saga of India’s electricity sector is well-known. The egregious failure of state PSUs that monopolise distribution is well documented in a new book. Under the much-vaunted Ujwal DISCOM Assurance Yojana (UDAY), launched in late 2015, states agreed to convert 75 per cent of their power distribution companies’ debt into state government bonds. While Rs 2.32 lakh crore of bonds have been issued since then, a new NIPFP study finds that the agreed financial and operational efficiency parameters have still not been met in many states. Technical and commercial losses still exceed 25 per cent instead of the agreed 15 per cent.

The costs of failures of SPSUs in the electricity sector have been enormous, going beyond the fiscal to undermining industrialisation and the banking sector. To prevent further financial haemorrhaging, states have increasingly undermined the state regulatory agencies and reneged on power purchases agreements with renewable energy companies, adversely affecting even the latter.

A review of CAG reports on state PSUs finds some chronic afflictions such as the absence of a business plan, no production or marketing policies, all of which are critical for any commercial enterprise. And, of course, acts of financial omission and commission are rife.

Take the CAG’s report on Bihar’s PSUs:

“Delays/non preparation of accounts are fraught with risk of misrepresentation of facts, fraud and misappropriation.  The 18 PSUs that had finalised their accounts in the last three years had an average negative Return on Investment of 6.14 per cent against average borrowing cost of 8.49 per cent resulting in total loss to the public exchequer of Rs 1,159.75 crore in the past three years alone. The loss on account of the remaining 56 PSUs whose accounts have not been finalised cannot be estimated. The basis on which the State Government extended without accounts, budgetary support of Rs 4,431.54 crore to seven working PSUs and Rs 1,007.23 crore to 10 non-working PSUs is not clear. The shortcomings in three government companies and one corporation are so serious that the CAG has declined to give an opinion on their accounts.”

One could argue that SPSU losses are more due to price controls imposed by their parent governments than by operational inefficiencies. While that is indeed the case – exemplified by the electricity sector – such controls are intrinsic to the political economy of PSUs. That is precisely why the CAG’s reports have so little effect since they are given to the very body responsible for exercising oversight over SPSUs – the state legislatures – whose member’s actions are at the heart of these problems. When the fox is put in to guard the henhouse, the results should not surprise us.

Devesh Kapur is the Starr Foundation South Asia Studies Professor and Asia Programs Director at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University.

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